HARAMBEE UNIVERSITY

FACULTY OF BUSINESS AND ECONOMIS

ACCOUNTING AND FINANCE DEPARTMENT
FINANCIAL MANAGEMENT II
Group Assignment given for accounting students who attend weekend program
And belong to 3rd year 2nd term (2016 A.Y) RD 25/04/24 (utmost 3 students as a group)

Q1. A co. has poposed an investment costing br. 210m which will be raised 25% by common
debt, 15% by preferred stock and the rest by common stock.what is the debt-to-equity ratio?
Is the company levereged or not? Why?

Q2. X Co. requires br. 10m for its proposed plan.the following alternatives are available
Plan 1: 100% equty capital ( fv br.100)
Plan 2: 75% equity capital (fv br.100) and 25% preference shares ( rate of dividend 6%)
Plan 3: 60% equity capital (fv br. 100) and 40% debenture ( interest rate 6%)
Plan 4: 50% equity capital (fv br.100), 25% preference share (dividend rate 6%) and 25%
debenture (interest rate 6%)
The tax rate applicable to the co. is 40% and it expects an EBIT of br.
Required:
a. Calculate the EPS under each plan
b. Calculate financial break-even point
c. Indifference point of EBIT b/n different plans(for example, plan1 and 2,plan1 and 3…)
Q3. Z co.’s management is contemplating two alternatives financial plans, the detailed
information is given below
Plan A plan B
Common stock br. 20,000,000 br. 15,000,00
Preferred stock 12,000,000 10,000,000
Debt 8,000,000 15,000,000
The par value of common stock is br. 100, preferred stock has br. 100 par value and 15%
dividend and long –term debt is presented by 10-year bonds of 10,000 par value and a fixed
annual coupon rate of 8%. The company income tax rate is 50%.
How much is the amount of EBIT where EPS is equal at both plans?
Q4. Abc co. currently has br. 3m of 7% coupon bonds and 100,000 common shares
outstanding.The tax rate is 40%. The company is considering a new project which requires an
investment of br. 4m. The co. is appaising two options for raising the capital:
Option 1: issue br. 3m of 8% coupon bonds with a 15-year maturity, and br. 1m of common
stock at br. 100 per share.
Option 2: sell br. 4m worth of common stock at br. 100 per share.
Calculate the EBIT indifference point for the two option
Q5. The following information is collected from the annual report of x company.
Profit before tax……………………. Br. 100,000
Tax rate………………………………… 25%
Dividend payout ratio……………………60%
Numbers of outstanding shares…………. 5,000
Cost of capital…………………………….12%
Rate of return …………………………….15%
What should be the market price per share based on Gordon’s model of dividend policy?
Q6. From the following information relating to a company, determine the market price of a share
using Gordon”s model:
Total investment in assets………………… br. 400,000
Number of shares…………………………… 10,000
Total earnings………………………………..br. 100,00
Cost of capital……………………………….17.5%
Retention ratio……………………………… 50%
Q7. Suppose that a company will pay the following dividends per share for the next three years

Year Expected dividends

1 Br. 2
2 3
3 4
In addition the stock price will be br. 40 at the end of three years. If the required rate of return on the
share is 10%, what is the estimated value of a share today?

Q8. X co. requires br. 1,000,000 for its proposed plan for which the following alternatives are available
Plan 1: 60% equity capital (FV=br.100) and 40% Preference share (dividend rate 5%)
Plan 2: 25% equity capital (FV=br.100) , 25% debenture (interest rate=6%) and 50% preference share
(6%). The co. expects an EBIT of br. 400,000 and its tax rate is 50%.
Required:
a. EPS for each plan
b. Financial Break-even point
Q9. Z Ltd. has 100,000 shares at br.10 per share. The company is considering a br.5 per share
dividend at the end of the year. It expects a net income of br.100, 000 and has a proposal for
a new investment of br. 500, 000.The company’s cost of capital is 10%.
Required: Calculate the company's share price under the following two conditions:
 Dividend declared
 Dividend not declared

Q10. Suppose a co. will pay dividend of br. 10, br. 20 and br. 25 for the next three years. After
the third year, the dividend will grow at a constant rate of 5% per year. The required return is
10%.what is the value of the stock today?